The business objectives are maximizing profits, growth, survival, and market share. Which one to choose can vary between businesses. For example, some companies may pursue maximum profit by optimizing sales at a minimum cost. On the other hand, others may be chasing market share to become leaders in their market.
Say a company sets market share as its primary objective. That requires the company to generate strong sales, higher than the average competitor. A higher market share ultimately leads to higher profits. The market leader makes more dollars than competitors. In addition, the company can also lower costs through higher economies of scale.
Some other companies may make survival an objective. They may still be young, so they don’t have a steady market position yet. Therefore, they are trying to maintain sales amid pressure from other established companies. Moreover, when companies operate in a hypercompetitive environment, survival may also be their objective.
Why are business objectives important?
Business objectives are essential to companies for several reasons. First, objectives give companies a direction to aim for and achieve in the future. It allows everyone to work together to achieve it.
Second, goals become the basis for designing strategies and tactics. So, with clear goals, managers can design related strategies. Conversely, they may pursue a directionless and random strategy without a set objective.
Third, an objective can also be motivation. Top managers may not be able to make every decision. So they empower managers under them to make mid-level decisions. And when they understand the overall objective, they can feel confident in making decisions to contribute to achieving the stated objective.
Fourth, objectives help management to mobilize resources effectively. Management designs strategies to achieve the set objectives. This includes mapping and making plans to allocate the required resources. Finally, objectives become a means to mobilize business resources and energy to create the future.
What are some examples of business objectives?
Business objectives are sometimes equated with corporate objectives. They are not for a single business function. Instead, they become targets for the organization as a whole.
There are several examples of business objectives. They include:
- Market share
- Cash flow
- Shareholder value
- Customer satisfaction
- Ethics and social
Maximizing profits is an easy goal to measure. It is reached when companies have more revenue than costs, and the difference between the two is the highest. In other words, they generate maximum revenue at a minimum cost.
As well as being easy to measure, maximizing profits is a crucial goal for most private companies. They are profit-oriented, so they try to pursue the highest possible profit. Generally, they will try to maximize profits after breaking even.
How do companies maximize profits? They have to find the right balance between their selling price, sales volume, and operating costs to achieve a profit. Take a company with a cost leadership strategy as an example. The company offers products at an average price but operates more efficiently than its competitors.
Companies with a cost leadership strategy have relatively low margins per unit. So, to maximize profits, they try to pursue maximum sales volume as quickly as possible. That way, they can lower costs through higher economies of scale. If successful, their margins increase as operating costs decrease while selling prices remain relatively unchanged.
Why is profit significant for business? Profit indicates how much money a company generates. It’s essential for long-term health. Without operating profitably, companies will go out of business because they cannot afford to pay costs.
In addition, profit is also internal capital. When it generates profit, the company stores it as retained earnings and becomes equity capital. And apart from being a cushion when times are tough, this capital can also be allocated to support long-term growth.
Then, high profits also enable companies to raise external capital more easily. For example, creditors are interested in lending money to profitable companies because they see that they have a high ability to repay. Conversely, suppose they provide loans to less profitable companies. In that case, they are only willing to charge high-interest rates to compensate for the higher credit risk.
Growth can involve several measures, including total assets, revenue, or the number of customers. Some may also refer to production volume or the number of employees.
This business objective is common to small and medium-sized companies. They have a relatively small market size. And they’re trying to grow their business, at least outpace market growth. If they do this successfully, their position and market share will increase.
Growth objectives are essential for several reasons. First, growth gives companies stronger bargaining power with stakeholders, especially suppliers and customers.
Second, growth can bring more profit – though not always. For example, a company can achieve higher economies of scale by growing sales. Thus, they can lower costs by spreading more fixed costs over more output.
Take buying inputs as a case. When sales increase, the company requires more input. With a larger purchase size, the company can negotiate discounts with suppliers. As a result, they get lower unit costs for the inputs they buy.
Then, to grow the business, companies can take several ways. We can look back at the Ansoff matrix if we relate it to markets and products. For example, they might pursue a market penetration strategy by spending more on promotion. Or, they develop a new product and sell it to the existing market. Or developing new markets is another alternative, for example, expanding into foreign markets.
Cash flow is essential for small companies. They must be able to generate positive cash flow to sustain their business. The money they receive must be greater than what they spend. Failure to do so could lead them to bankruptcy.
In addition, cash flow is often also a consideration for several large companies. They usually rely on the accrual method for financial reporting, under which cash will not equal profit. And unlike profits, cash flow gives an actual picture of how much money they make. For this reason, they may look more closely at cash than profit.
Survival is the most basic business objective. It is closely related to cash flow. Therefore, companies must generate positive cash flow to survive in the industry.
Conversely, companies with negative cash flow spend more money than they are making. They may be able to survive for some time by relying on internal or external capital. But, if it lasts long, negative cash flow can lead them to failure.
Survival is critical for new businesses. Their survival will depend on keeping cash flows high enough. So they try to grow their business and survive the attacks of competition.
In addition, survival is a common business objective under challenging times, for example, during a recession. The recession makes sales decline because consumer demand falls. In addition, competition has become more intense as market growth has slowed down.
Then this objective is also common for companies in hypercompetitive environments where competition is intense and competitive advantage can quickly disappear.
Social and ethical
Social and ethical objectives have become increasingly important recently amid increasing concern for the environment and good corporate governance. Companies emphasize their operations on three aspects in a balanced way: profit, people, and the planet.
Social and ethical objectives are implemented in several aspects. For example, the company only produces environmentally friendly products. Or, they emphasize non-emissions in their operations by using green energy. Or they use biodegradable packaging to reduce their impact on the environment. Long story short, social and ethical objectives require companies to ensure their business does not cause harm to the environment or people.
Market share describes how prominent a company’s market position is compared to competitors. If we use sales as a measure, we calculate it by dividing the company’s sales by the total sales in the market (all players).
For example, suppose a company sets its market share to increase by 5% in two years. It requires the company to grow higher than the market growth. In other words, the company’s sales must increase higher than the total sales in the market.
The market share objective may complement the growth objective because market share will increase if the company’s growth is higher than market growth.
Then, there are several ways to increase market share. For example, the company might increase promotions to attract more new customers and encourage existing customers to increase repeat purchases. In addition, the company may launch new products into existing markets.
Shareholders expect a higher return for the money they invest in the company. And returns to them come from two sources: capital gains and dividends. They earn capital gains when the company’s stock price rises and is higher than the initial purchase. Meanwhile, dividends are net profit distributed to shareholders besides a portion held as retained earnings.
Thus, we can identify delivering value to shareholders by giving them a high return for the capital they invest. Therefore, management must prioritize their interests by making decisions that increase shareholder value.
In strategic management, maximizing shareholder value is closely related to sustainable competitive advantage. When companies maintain a competitive advantage over time, they can deliver a higher return on invested capital (ROIC) than the average competitor.
Customer satisfaction is the key to business continuity. But in addition, satisfaction can also lead to free promotions. I mean, satisfaction will encourage customers to recommend products to others. And for companies, it’s a free promotion because they can acquire new customers without spending additional promotion costs.
Customer satisfaction represents how happy the customer is with the product or service provided by the company. It is achieved when the company delivers value equal to or higher than expected by customers.
Satisfied customers will be willing to repurchase, access the company’s other products or recommend them to others. Eventually, it will lead to loyalty. And if companies successfully maintain customer loyalty, money will continue to flow to them.
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